Disney buys YouTube channel operator Maker Studios for $500M

Disney is buying YouTube channel operator Maker Studios for $500 million as the family entertainment giant aims to stay in front of younger audiences who are increasingly watching short videos online. (Jae C. Hong/Associated Press)

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Disney said Monday that it is buying YouTube channel operator Maker Studios for $500 million as the family entertainment giant seeks to stay in front of younger viewers who are increasingly watching short videos online.

It's the latest and largest acquisition of a YouTube channel network by a major Hollywood studio and represents another vote of confidence in the video service as an incubator of talent.

The Walt Disney Co. said it would pay up to $450 million more in bonuses if Maker meets performance targets, the company said. The Maker deal is Disney's biggest acquisition since it bought "Star Wars" creator Lucasfilm Ltd. for $4.06 billion in late 2012.

The purchase will give Disney ownership of 55,000 channels — including Epic Rap Battles of History and makeup expert Amy Pham's The Fashion Statement. Combined, Maker has 380 million subscribers and generates 5.5 billion views per month.

Buying Maker Studios will help Disney reach young audiences, said Kevin Mayer, Disney's executive vice-president of corporate strategy, in an interview.

"They have the biggest audience on YouTube. It's very hard to replicate," Mayer said.

He said that while Disney also reaches younger viewers, their habits are changing.

"To the extent that they're finding YouTube, we want to be there too," he said. "We don't want to have any vacuums."

Mayer said that Disney could also find talent for its TV shows and movies in the YouTube stars on Maker Studios' channels.

It wouldn't be the first attempt to mine YouTube for characters that could be taken mainstream. In 2010, Lions Gate Entertainment Corp. released "Fred: The Movie" in 2010, using the character that Lucas Cruikshank turned into a viral, if annoying, sensation on YouTube.

The purchase is a sign that the entertainment industry's content and technology startups are coming of age and proving to be as valuable to Hollywood as app makers are to the giants of Silicon Valley.

The deal also signals Hollywood's new openness to technological innovation, an acknowledgement that media giants don't have all the answers. The acquisition comes a month after The Walt Disney Co. launched a technology startup incubator called Disney Accelerator, which promises to seed 10 companies with $120,000 each to develop ideas that'll have a big impact on entertainment and technology.

Disney's purchase price — which could hit $950 million if Maker hits performance targets — also validates the increasing value of so-called "multichannel networks." Those are the mini media empires that provide funding and support to video creators while taking a cut of ad revenue generated from views on YouTube.

When people subscribe to these channels, they're notified when new videos are available. That helps networks generate regular views on multiple devices, and enables them to deliver video ads on a massive scale.

Media giants move into digital

It also follows other media giants into the space.

Earlier this month, Time Warner Inc.'s Warner Bros. led an $18 million investment into videogamer network Machinima. Last year, DreamWorks Animation SKG Inc. bought the AwesomenessTV network for $33 million, with a bonus potential of $117 million if the studio met earnings targets over two years.

Peter Csathy, chief executive of investment fund Manatt Digital Media Ventures, said the scarcity of leading YouTube channel networks has contributed to a run-up in the price for the few that remain.

Hollywood studios investing in YouTube content:

March 2014: Disney buys Maker Studios for $500 million

March 2014: Warner Bros. $18 million investment in Machinima

2013: DreamWorks Animation SKG buys AwesomenessTV for $33 million

2012: Legendary Pictures buys Nerdist Industries

"The mass numbers of viewers coming to these channels is what it's all about," Csathy said. "It's the numbers and the scale. It's that coveted young demographic. Those are the contexts underlying all of this."

Richard Raddon, co-founder of online video management company ZEFR, said traditional media companies have only recently begun to see YouTube as a valuable platform to invest in.

"A few years ago, I don't think YouTube was on their radar as a big, broad, viable global platform with an enormous audience. It is today," Raddon said.

For Maker, the acquisition marks a stunning ascent.

Founded in 2009 by YouTube stars Lisa Donovan and her brother Ben, Danny Zappin, Shay Carl Butler and Kassem Gharaibeh, the company operates out of makeshift offices spread over several buildings in Culver City, California, and generates hundreds of videos every month.

When The Associated Press visited Maker in late 2011, it was shooting videos in the alley. The space was full of costumes, props, computers, and cables running everywhere.

Maker raised $70 million in two fundraising rounds from 2012 to 2013 that reportedly valued it around $300 million. Investors included Time Warner Inc. and others.

Last year, Ynon Kreiz, the former CEO of production company Endemol, became Maker's CEO after Zappin stepped down in acrimony. Zappin later sued his co-founders over his ouster.

The combination of Maker's earnings and accounting charges Disney will have to make on the purchase will dampen Disney's earnings per share "mildly" through the 2017 fiscal year, Mayer said.